Will 2012 Growth Stories Boost This Tech Laggard?

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Micron Technologies (NASDAQ: MU) recently announced that the Japan Fair Trade Commission has cleared Micron’s proposed acquisition of Elpida, a leading manufacturer of Dynamic Random Access Memory (DRAM). The clearance satisfies one of the conditions necessary for the consummation of the transaction. According to Micron, the transaction also cleared pre-merger review in the United States, Czech Republic, and Korea. Micron has been trading at low price multiples. Do the growth stories surrounding its strategies to return to profitability reflect in the company’s low price multiples?

For the 2012 fiscal year, Micron reported a net loss of $1.03 billion on net sales of $8.2 billion, compared with net income of $167 million on net sales of $8.8 billion for the 2011 fiscal year. Though the company's consolidated gross margin of 12 percent in the first quarter of fiscal 2013 was up slightly from 11 percent in the fourth quarter of fiscal 2012, revenues from the sales of DRAM products were 12% lower in 2012 compared to 2011. Revenues from sales of NAND flash products were 14% higher in 2012 compared to 2011, but they couldn’t make the company profitable.

Why are Micron’s strategies not increasing sales growth?

Micron’s falling revenues are blamed on a decrease in the trade of NAND flash sales as a result of lower production of the product. Improvement in margins from sales of NAND flash and NOR flash products were offset by margins from sales of DRAM products. Micron suffered from shifting market demand and internal operation disruption.

In February, Micron announced an agreement with Intel (NASDAQ: INTC) to expand its NAND flash memory joint venture to increase efficiency in sales. In the same month, it became the largest shareholder of Inotera Memories, a major DRAM maker in Taiwan, after fully subscribing 763 million shares issued by Inotera via a private placement. During the first quarter of fiscal 2013, Micron entered into two credit facilities. The first was a revolving credit facility providing for borrowings of up to $255 million. The second was a term note providing for borrowings of up to $214 million. Micron also acquired an 89% stake in another memory company, Rexchip, in June 2012.

Micron announced results of operations for its first quarter of fiscal 2013, which ended November 29, 2012. The company reported a net loss attributable to Micron shareholders of $275 million on net sales of $1.8 billion. This compares to a net loss of $243 million on net sales of $2.0 billion for the fourth quarter of fiscal 2012, and a net loss of $187 million on net sales of $2.1 billion for the first quarter of fiscal 2012. NAND flash sales volume in the quarter decreased compared to the fourth quarter of 2012. Operating expenses included losses of $62 million in the first quarter of fiscal 2013 and gains of $9 million in the fourth quarter of 2012.

“In 2012, despite difficult market conditions and lower average selling prices, we continued to execute on our technology and manufacturing road maps and moved our products increasingly into premium segments. Our focus throughout 2013 is to drive additional cost reductions and advance our leading-edge memory technology to achieve increased manufacturing efficiencies,” said Micron’s CEO, Mark Durcan.

The acquisition of Elpida may enable Micron to double its share of the memory market to 24% and gives the company a significant foothold in Asian markets. The memory market is fast evolving, and gaining a large market share is good for Micron. However, if we relate its acquisitions, partnerships, and joint ventures to its financial statements, it is clear that Micron has not improved its position compared to 2011.

Peer Comparison

With earnings per share (EPS) of -1.12, compared with Qualcomm’s (NASDAQ: QCOM) 3.51, Texas Instruments’ (NASDAQ: TXN) 1.52, Intel’s 2.29, and a gross margin of 11.16%, compared  with Intel at 63.28%, Advanced Micro Devices (NYSE: AMD) at 31%, Texas Instruments at 51.33%, and Qualcomm at 63%, Micron is behind its peers. Micron currently has a net income of -$1.032 billion, far behind its rivals in the semi-conductor sector. Qualcomm reported net income of $1.27 billion for the third quarter of 2012. Texas Instruments reported net income of $769 million during the quarter, while Intel reported $2.97 billion and AMD reported -$157 million. 

Summary

Looking at the successive strategies and worsening margins, I can say that Micron is not operating at an optimum efficiency level and is not a good buy at the moment.


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